What is a sinking fund?
A sinking fund is money you set aside a little at a time for a specific expense you know is coming — car insurance, Christmas, a new laptop. It's different from an emergency fund because you already know what it's for and roughly when. You're not saving in general; you're pre-paying a specific bill in instalments you choose.
Why it exists
Some expenses are certain but not monthly. Car insurance every six months, a holiday in December, tires eventually. They aren't emergencies — you can see them coming — but they arrive as one large number that no single paycheck can absorb.
A sinking fund turns that number into a monthly one. $1,200 of insurance due in June is $200 a month starting in January, or $100 starting in July.
The arithmetic
Take the amount, divide by the number of paychecks between now and the due date, and round up. Rounding up matters: rounding down means arriving short on a date you already knew about.
If you have several running at once, the total per paycheck is what actually competes with your spending money — not each one individually.
Sinking fund or emergency fund
An emergency fund covers what you didn't see coming and should not be spent on anything else. A sinking fund is earmarked and is supposed to be spent, on the thing it was named for.
Mixing them is why people feel like they never have savings: the emergency fund keeps getting drained by expenses that were never emergencies.
Written by Larder, makers of an envelope budgeting app for iPhone. Last reviewed .